California Distributor Law Clarified by Federal Judge

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FILED NOVEMBER 5, 2009

Dear Client:

In the ongoing MillerCoors, DBI, and Maita case in California, federal judge Ronald Whyte on Tuesday handed down orders on requests for summary judgments that dolled out mixed victories, but most importantly he ruled that California law does not allow successor-suppliers like MillerCoors to terminate distributors or cancel agreements, it merely allows for a process to determine fair market value, handing a victory to distributors (as it's the first federal ruling on the fairly new California franchise law). While the judge also granted summary judgment victories to DBI and MillerCoors, this first point kind of takes the teeth out of them since little can happen if MC, as a successor supplier, loses its right to terminate without cause. This was argued in the California Beer and Beverage Distributors association amicus brief successfully. The ruling has deep implications for California wholesalers as it sets an important legal precedence in federal court to give distributors de facto franchise protections, even when a supplier is acquired by or merged with another supplier, which wasn't the case before. These are summary judgments, and the case goes on from here within these parameters. Regardless, successor suppliers may want to think twice about terminating in California after this. This federal ruling could have implications for cases going on in other states like Ohio and Colorado.

BACKGROUND. To refresh, you'll recall that late last year MillerCoors notified Maita Distributing (along with Elyxir and Mussetter) that they would be terminated without cause as a successor supplier and that DBI Beverage would be the designated buyer. After negotiations failed to produce a sale(s), DBI filed for arbitration to discern what is fair market value for the distributors' Miller and Coors brands as called for in California law, which the distributors fought, arguing that DBI missed the deadline to file arbitration, didn't negotiate in good faith, that using arbitration is an unconstitutional impairment of the distributors' rights under the MC contract, the terminations weren't valid because MillerCoors isn't a true successor supplier, and that the arbitration rule in California law only applies when acquiring brands in same-market vertical consolidations.

A state court judge ruled that it will neither force arbitration or prevent it, so arbitration continued with distributors' reluctant participation, with arbitration starting in December. (Meanwhile, Elyxir made a separate peace with MC and dropped out of lawsuit and will remain a MillerCoors distributor). Maita refiled its lawsuit to prevent arbitration in another state court, and DBI had the case moved to federal court and MillerCoors joined the suit as an intervenor. Both sides sought summary judgments on a variety of points. Maita again argued that the California law forcing arbitration was unconstitutional and inapplicable to its situation since DBI wasn't a competitor within its market. DBI and MillerCoors basically argued the opposite, and MC argued that it had a right to terminate under California law as a successor supplier.

Meanwhile, the California Beer and Beverage Distributors filed an amicus brief in the lawsuit challenging MillerCoors' and Maita's interpretation of the California law, which compelled DBI to pull out of CBBD and presumably was one of several reasons why MillerCoors failed to renew their membership as an associate brewer member. As Ringo Starr is fond of saying, "Peace and love, peace and love." Or as Gussy Busch used to say, "Making friends is our business."

So that's where we currently sit. Now this: In an order issued on Tuesday, Judge Whyte ruled on the following six issues. The judge ruled that:

1. California law does not override Maita's existing contracts and allow MillerCoors to terminate contracts that cannot be terminated except for cause. Victory: Maita and CBBD. This is crucial and was a major issue, as said above. The judge essentially ruled that successor suppliers are now bound by the contract they originally had with their distributors.

2. However, Maita's belief that it cannot be forced to arbitrate the value of its distribution rights was denied by the court. So to arbitration we go. Victory: DBI

3. DBI is indeed likely a proper successor brewer's designee under California law, even though it doesn't currently do business in Maita's territory. Victory: DBI

4. But, the court ruled that it won't rule on whether or not DBI negotiated in good faith. This will have to be sorted out in trial. Victory: Maita

5. MillerCoors is right when it contends that California law applies when the existing beer wholesaler already distributes all of the successor brewer's brands. Victory: MillerCoors

6. MillerCoors is also right that California law applies to contracts that are terminable for cause and to contracts terminable at will. However, says the court, California law does not grant successor supplier a right to terminate without cause. Victory: MillerCoors, sort of. Basically the judge takes the oomph out of MC's victory because nothing happens if MC can't terminate the distributor to begin with.

So in the end, CBBD's arguments as set forth in their amicus brief were taken up by the judge, and the part of Calfornia law that deals with distributor transfers is now in case history. It can be construed as a huge victory for the California distributors who helped put he law in place, and the first ruling on the law by a federal judge. The case goes on to presumably be litigated as arbitration simultaneously looms in December.

MillerCoors reported strong profits yesterday amid tough volume trends. BBD spent some one-on-one time with MillerCoors chief Tom Long to ask him about the recent trends, and MillerCoors' strategy going forward. You, my friends, are a fly on the wall:

TOM ON THIRD QUARTER RESULTS. "We had a very satisfactory quarter. We've had five of them in a row, knock on wood. We're pleased that we've delivered strong revenue growth, cost management, and synergy delivery. But probably more important than that, coming out of the distributor meeting in Chicago, we are focusing on executing as a system and taking this company to the next stage of the rocket."

TOM ON HIGH-END / IMPORT SOFTNESS. "I don't have the double secret password, Harry, that's for sure. But I do have some observations as to why the top end of the business is hurting. It's overly reliant versus other segments on the on-premise, which is weak, so naturally it's going to be soft. And second, particularly for the imports, these brands have big competition from crafts who are gaining distribution big time. So they're getting hit in their biggest channel from new competitors. A big brand like Corona, for instance, they don't have any demographic winds at their back. As Drucker said, nothing's more certain than demographics. But I think it's way too early for folks to call it, that this is a long term decline. I think the next generation of premium imports - brands like Peroni and Dos Equis - are advantaged because they are still gaining distribution, and since they don't have to discount, they can give higher margins to distributors and retailers. But I don't think we should call for the certain and long term decline in these big import brands. It's too early."

ON MILLER LITE. "One thing we're pleased with is the growth in share of our premium lights. And that's accelerating. If you look at the last 52 weeks, 13 weeks, 4 weeks, and the last week [in Nielsen], you'reseeing our share of premium lights continuing to accelerate. Miller Lite has not improved as much as we'd like. But since March, it's baseline volume [non-discounted volume] has continued to improve. And its penetration with what we call key beer drinkers [LDAC 21-24] is also still growing. The underlying strength of Miller Lite is pretty good. The ads are testing well with consumers. We're confident it will do better."

ON PREMIUM LIGHTS. "Bringing new news to our big brands, and doing it in fewer, bigger, and better ways, is really our strategy on all of our premium lights. Bringing innovation with our Alumitech, Home Draft, etc. is really important to our strategy. We're not only driving better programming with news value, our presence in the market is way up in November and December. We're excited about that because we're entering the heart of football season, which is key for Coors Light.....

"I want to call special attention to the fact that in this tough economy, four of the six biggest value-driving brands in the business have come from this new company in its first full year. And I think that's an astonishing testament to our distributors and to our employees."

TOM ON KEYSTONE LIGHT. "It's mostly taking share from Natural Light. That's by far its highest interaction rate, and we're pleased with that. And Key's got a lot of opportunity for distribution, as does Coors Light. Keystone Light's simple distribution, that's any package, is 17 points less than Natural Light. We've got room for execution growth on Keystone."

ON LINE EXTENSIONS OFF MILLER LITE. "All of us in the beer industry need to focus on building big, strong brands. It's so important for sustainable wealth creation for distributors, brewers, and retailers. That's the model that really got us here. And anything that fragments the worth of longterm sustainable franchises, we're really skeptical of. It doesn't mean we won't test things, but fundamentally you've got to protect the core, before you tackle the crust. We've said we need to get our core brands healthy before we start line extentions, and that's what we're doing."

ON MILLER AND COORS CULTURE CLASH. "I think we're making great progress on that. You're always going to have issues like that in mergers. But I think it's been an extraordinary success story. Like many firms, we do engagement surveys with our people, even in the first month we came together. And our engagement studies have shown, especially with our commercial people (sales, marketing, pricing people) is right at the top of the charts. Harry, it's above the best performing firms in America. This is encouraging to us. We're getting more unified as time goes on. I hope folks see the best of the old companies in our new company. It says MillerCoors on the bus, and the bus has left, and most people are jumping on."

ON DISTRIBUTOR-BREWER TENSIONS. "Coming out of Las Vegas and Chicago, I thought the tone was positive and focused, and the feedback we've received was positive and focused. While there's some noise in the system, I think it's all going to get worked out. We're focused on selling beer. Positive sales momentum always makes everyone in the system feel a lot better. That's what needs to be focused on."

ON RETAILERS' VIEW OF DSD. "At our last meeting with our distributors, we talked very clearly about our need to collectively raise execution. And we'll always want to raise our execution levels to our customers. But 95 to 98% of our customers understand the value of DSD. And those customers who have done the activity-based costing studies, have seen the value of it. Our point is that the customers who are really into brand building know that this DSD system creates the most value and is also the most efficient logistically. They also know that MillerCoors supports DSD. We've had the test with Wal-Mart and other sophisticated retailers, and the results show that, while we can get better, fundamentally this system creates value, and I haven't seen any data that suggest otherwise."

Until tomorrow, Harry

"Laugh and the world laughs with you, snore and you sleep alone."-Anthony Burgess

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